The IRS issued guidance regarding tax treatment of certain employee benefits for same gender marriages, making ERISA compliance a little more complicated. HHS also issued guidance relating to Medicare and DOL issued guidance relating to FMLA as it relates to same gender marriages.
The Supreme Court decision in U.S. v Windsor that holds Section 3 of the Defense of Marriage Act (DOMA) unconstitutional has many repercussions for employee benefit plans. The IRS issued Revenue Ruling 2013-17 which addresses tax issues and some benefit issues. The Revenue Ruling is effective as of September 16, 2013 leaving little time for employers and plan sponsors.
However, the IRS intends to issue guidance regarding same gender marriages which addresses issues such as:
- Plan amendments and their timing and
- Any necessary corrections relating to plan operations for periods before future guidance is issued
Released concurrently with the Revenue Ruling were two sets of Frequently Asked Questions (“FAQs”) – Answers to Frequently Asked Question for Registered Domestic Partners and Individuals in Civil Unions and Answers to Frequently Asked Questions for Individuals of the Same Sex Who Are Married Under State Law. The latter has questions specifically related to employee benefit plans. The Department of Health and Human Services released information regarding Medicare and skilled nursing facilities. The DOL released a Fact Sheet regarding FMLA which defines “spouse” differently than the IRS.
In this ErisaALERT we will briefly touch on issues related to employee benefits. The bottom line is that we have some guidance but need much more.
Revenue Ruling 2013-17 in Summary
In the Revenue Ruling, the IRS concluded that for federal tax purposes, the terms “husband and wife”, “husband”, “wife” include an individual married to a person of the same sex if he/she was lawfully married in a state whose laws authorize the marriage of two individuals of the same sex and the term “marriage” includes such marriages of individuals of the same sex. This holding applies regardless of which state the individuals may live.
Note: In Fact Sheet 28F issued August 2013 dealing with FMLA, DOL defines spouse as
“Spouse means a husband or wife as defined or recognized under state law for purposes of marriage in the state where the employee resides, including “common law” marriage and same-sex marriage.” (emphasis added)
However, the term “marriage” does not include registered domestic partners, civil unions or similar relationships not considered a “marriage” under state law, regardless of whether it is a same sex or opposite sex relationship.
Employee Benefit Implications
The Revenue Ruling notes that guidance will be forthcoming regarding the retroactive application of the Supreme Court’s decision to employee benefit plans. Any guidance will take into account the ramifications to the plan sponsor, the plan and affected employees and beneficiaries. There may be retroactive tax consequences.
Let’s briefly examine employee benefit areas requiring immediate attention. ErisaALERT 2013-04 Page 2
www.erisadiagnostics.com August 2013 ErisaALERT©
Health and Welfare Plans
Section 125 plans – the Revenue Ruling states that employees paying for health coverage for a same sex spouse under an IRC §125 plan may treat contribution as pre-tax without imputed income. Payroll must be updated to reflect the correct tax treatment.
HRAs, FSAs and HSAs – employees will be able to use pre-tax dollars for a same sex spouse (without imputed cost in the case of an HRA). More guidance is needed regarding the ability to make a mid-year change because of the latest guidance.
Note: The ability to contribute pre-tax (for State tax purposes) will have no impact on States which do not recognize pre-tax contributions, e.g., New Jersey.
COBRA – same sex spouse may be entitled to full COBRA rights; COBRA notices will require modification.
HIPAA special enrollment – same sex spouse may be added to employee’s coverage
Dependent Care – same sex dependent care payable through the DCAP
Retirement Plans.
Qualified Joint and Survivor (J&S) Annuity – same sex spouse will now be entitled to the 50% QJ&S annuity payable under defined benefit plans, money purchase pension plans and 403(b) plans unless the same sex spouse consents to distribution in another form of payment or to another payee. The FAQs clearly state that “A qualified plan must treat a same-sex spouse as a spouse for purposes of satisfying the federal tax laws relating to qualified retirement plans.”
Qualified pre-retirement survivor annuity (QPSA)– many defined benefit plans subsidize the QPSA and therefore an election to receive and consent to waive may be a moot issue. However, where the plan charges for the QPSA and provides the necessary election forms, the same sex spouse must consent to waive if elected by the participant.
Rollovers – same sex spouse will be able to rollover the distribution of a deceased participant to his or her own IRA.
QDROs – the same sex spouse will be able to obtain a QDRO in states where same sex marriages are recognized or in community property states.
Hardship distributions (401(k) and 403(b)) – currently a plan can allow for a hardship distribution by reason of a spouse’s funeral, tuition and medical expenses. If a plan provides such a provision, the hardship distribution feature will be available to the same sex spouse.
Loans – same sex spouse consent would be required for a loan.
Minimum distributions – the same sex spouse will be entitled to the same distribution options currently afforded the opposite sex spouse, i.e., the beneficiary can defer payment until the end of the calendar year in which the participant would have been 70 ½. In addition, the minimum incidental death benefit rules will not apply to same-sex spouses.
Some tax issues related to employee benefit plans
Employees who had imputed income attributable to the value of health care coverage for a same sex spouse may file amended Form 1040 for open years (e.g., 2010 and forward) to obtain a refund. In addition, if an IRC §125 plan was available to pay premiums on a pre-tax basis, a participating employee can file an amended return to recover income taxes paid on premiums which the employee paid on an after tax basis for same sex spouse coverage.
The employer can claim a refund or make an adjustment for any excess Social Security and Medicare taxes paid. Employers can also make an adjustment for income taxes withheld in the current year only provided the employer repays the employee for any over withheld tax before the end of the calendar year.
What plan sponsors should do immediately:
- Review all plan documents for the plan’s definition of spouse. Await further guidance regarding amendment due dates.
- Review and update, as needed, all administrative procedures and forms.
- Decide if you will require documentation to establish proof of same sex marriage.
- Work with your payroll department to differentiate between same-sex marriages and civil unions since tax treatment differs.
- Communicate the changes to employees and remind them of the importance of up to date beneficiary designations.
- Contact plan service providers (e.g., actuary, recordkeeper, QDRO, payroll) to gain an understanding of how their procedures will change
- Stay tuned for more guidance
- Finally, don’t forget to become familiar with State law!
Note: all links are active as of the date of issuance of this ErisaALERT.
Disclaimer: This material is for the sole purpose of providing general information and does not under any circumstances constitute legal advice and should not be used as a substitute for legal advice. You should seek the advice of counsel when applying the requirements to your plan. For more information on this ErisaALERT contact us by phone at 610-524-5351 and ask for Mary Andersen,) or 215-508-5629 and ask for Theresa Borzelli, Esq. (SFE&G). Special thanks to Leanne Fosbre of HighRoads, Inc. for assisting with this ALERT.
